Approximately 14.1 million adults in the United States did not have bank accounts in 2017. Access to mainstream banking — institutions insured by the Federal Deposit Insurance Corporation (FDIC) — can provide financial stability and economic mobility, while exclusion from it can lead to economic insecurity. The federal government routinely surveys American households to estimate the country’s rate of financial exclusion, defined as the proportion of households that do not use mainstream banking services. A recent survey revealed black and Hispanic adults are unbanked at roughly four to five times the rates of white adults. I show race is the primary cause of financial exclusion and discuss policy solutions.
Consequences of living unbanked
Access to a traditional bank account can protect a family from severe economic distress. Unbanked individuals are adults who have no checking or savings accounts and rely exclusively on alternative financial services for all their monetary services. Alternative financial services are offered outside of mainstream banks, and include payday lenders, commercial check cashers, automobile title lenders, and more. These services take advantage of vulnerable consumers by charging large fees, setting high interest rates, and engaging in lax underwriting. As a result, consumers who use alternative financial services often become trapped in the “debt cycle:” they accumulate fees they cannot afford, default on their alternative loan, and then take out a second alternative loan to repay the first. People who borrow payday loans take on an average of ten loans per year.
The FDIC estimated 6.5% of American households were unbanked in 2017. The agency also estimated the national rate of financial exclusion for five different racial categories included in the survey.
Unbanked Rates by Race, 2017
| Primary householder race/ethnicity | Estimated number of households (1000s) | Estimated percent of demographic households that are unbanked |
| Black | 18,201 | 16.9 |
| Hispanic | 16,655 | 14.0 |
| Asian | 6,792 | 2.5 |
| Other | 2,030 | 12.8 |
| White | 85,599 | 3.0 |
Notably, the national unbanked rates have been decreasing since 2013. However, the gap still remains between white and nonwhite households, and some areas in the United States have experienced in their unbanked populations.
The challenges faced by unbanked adults are severe and urgent. Unbanked households are generally more vulnerable to poverty, eviction, and food insecurity because they do not have access to three major benefits of mainstream banking: financial stability, wealth-building opportunities, and protection from exploitative alternative financial services.
A checking account is a secure place to store and save money, and savings can help households weather temporary financial emergencies. Having at least $250 in savings makes a family significantly less likely to miss a bill or be evicted.
Mainstream bank accounts also offer the opportunity to increase wealth through products such as mortgages or small business loans. However, it is difficult to obtain wealth-generating loans without a credit history, and it is almost impossible to generate a credit history without a bank account. Mainstream banks use credit histories to determine the potential risk of lending to a customer. The credit bureaus typically generate a person’s credit score based on their use of traditional credit, such as credit cards or student loans. An unbanked individual who has never used those products would likely be “credit invisible,” having no credit history. Sometimes, banks are willing to lend to a credit invisible applicant with a recent history of healthy checking account activity. Unbanked adults have neither credit histories nor bank accounts; they are locked out of the traditional credit market, and have no easy way to enter it.
As a result, alternative financial services are unbanked households’ only option for financial transactions, such as cashing checks or accessing credit to cover unexpected emergencies. Payday lenders, commercial check cashing outlets, and other alternative financial services have two major drawbacks: they are expensive and more likely to be exploitative. For example, a check cashing service may charge a fee of up to five percent of the check’s value, while a mainstream bank will typically let its customers cash checks for free. Unbanked individuals must accept the high fees and dangers of alternative financial services because they have no other option.
Financial stability, wealth-building opportunities, and protection from exploitative alternative financial services are valuable ways to provide economic security. This raises the question: why do white households have more access to these benefits than black and Hispanic households?
White supremacy explains the financial inclusion gap
The most persuasive and comprehensive explanation for why black and Hispanic adults are more unbanked than white adults is the prevalence of white supremacy in America’s financial system. Nonwhite adults have far less wealth than white households, have lower median incomes, and earn less income over their lifetime. In 2017, approximately 21% of blacks and 18% of nonwhite Hispanics lived in poverty, compared to about 9% of non-Hispanic whites. Low-income families may not have enough income to maintain a bank account, and nonwhite adults are more likely to be low-income. One quarter of all households with less than $15,000 in income were unbanked in 2017. Almost 53% of surveyed unbanked households reported they could not afford a bank account.
Other unbanked individuals who have the finances to engage in mainstream banking may choose not to because they feel socially excluded by the banks. Black and Hispanic adults may perceive they don’t belong in mainstream banks. An FDIC study found participants felt more comfortable with their local alternative financial service providers than with their neighborhood banks.
The history of traditional banking in the United States justifies this level of distrust. The first national bank that accepted black consumers after the Civil War was the Freedman’s Saving and Trust Company. It went bankrupt less than a decade after it opened, due to poor management from its white leadership, and almost 40% of the bank’s customers never received their money back from the government. Mainstream banks have continued to exclude and harm black adults since then, as redlining practices explicitly told black communities they were not welcome at banks. More recently, the subprime mortgage crisis caused a huge loss in nonwhite wealth. Black and Hispanic households have many reasons to not trust mainstream banks, and this could be a contributing factor to the disparate rates of financial exclusion among black, Hispanic, and white adults.
Alternative explanations: financial literacy and geography
Some people may choose to be unbanked because they do not understand financial products. People without high school diplomas are still more likely to be unbanked than people with some college education, though the gap has slightly narrowed in recent years. Checking accounts can contain confusing fees and balance minimums. The complexity of banking may discourage people from participating in it. Hence, targeted adult financial literacy programs may encourage people to open bank accounts and practice saving habits.
However, institutions, not only individual ignorance, play a significant role in creating and perpetuating the financial inclusion gap. It is unlikely almost one sixth of black and Hispanic households are choosing to live unbanked because the application paperwork is too complex. Financial education programs are individual-focused solutions that fail to address the structural inequalities perpetuating the financial exclusion race gap.
Some critics of the financial literacy explanation propose geography as an alternative cause of financial exclusion. Decades of discrimination and underinvestment have deprived many majority-minority neighborhoods of certain amenities, such as grocery stores, pharmacies, and banks. Redlining policies and discriminatory lending practices discourage mainstream banks from considering nonwhite adults as potential customers. As a result, few banks may be operating in neighborhoods with high numbers of black and Hispanic residents. Black and Hispanic adults may have greater rates of financial exclusion because they must travel farther to locate a mainstream bank. Postal and mobile banking would address this problem.
However, it is unlikely geography causes the financial inclusion gap. Two FDIC economists propose distance has a small impact on a household’s likelihood of having a bank account. Their analysis finds a household is 1.1 percentage points more likely to be unbanked if there were no banks within five miles. Geography has a smaller effect than income or education level.
Conclusion
Policy solutions must carefully consider the many dimensions of financial exclusion. For example, eliminating alternative financial services would likely cause more harm to unbanked households. Payday lenders provide crucial cash to unbanked families in crisis. Without alternative services, financially excluded individuals may not survive expensive emergencies.
The federal government might incentivize banks to develop meaningful relationships with their surrounding communities, and particularly their black and Hispanic unbanked neighbors. Local advocates and unbanked households could advise banks on how to rebuild trust. Community Reinvestment Act evaluations (which are currently under review) and Community Development Financial Institution programs provide federal incentives but allow for local discretion in implementation. Any policy proposal that does not account for black and Hispanic adults’ distrust of white supremacy in mainstream banks will surely fail to reduce the racial gap in unbanked households.
Photo by Roadsidepictures on Flickr.
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